Succession Planning / Exit Strategy
Succession Planning is identifying and developing internal people to fill key business positions so that experienced and capable people are ready and able to fill key rolls when the need arises. In a family owned business which tends to be smaller in size it is also the creation of a plan for the continuation of the business upon the loss of the owner or removal of the owner through the sale of the business.
Scrambling to find a replacement for a key position will be costly in terms of time and lost productivity if done internally and expensive to go on the outside and use a head hunter which can cost 30 or 40 per cent of the placed employees salary. In the case of a family owned business the disaster on your family can be emotional as well as financial. Heirs may fight as to who runs the business, and who gets what to the extent it ends up in court and a judge decides what you wanted. Add to that the IRS tax liability which can be as much as 50% of the value of the business and neither the family nor the business will survive. Rarely does a business have 50% of its value in cash to pay the IRS.
The steps and goals in Succession Planning for Key Employees and Management are:
- Analyze and assess the Key Positions in your organization
- Identify the talent in your organization that have the potential to assume greater responsibility
- Assess their talent and provide them with experiences that will further develop them into leaders
- Engage their supervisors in developing their leadership abilities
- Build a data base that can be used to make decisions
- Monitor and Review the data on a regular basis
The added benefits will be:
- Better employee retention and commitment
- Improved morale by meeting career goal expectations of employees
- Eliminate the time and cost of recruiting or hiring a head hunter
The above would also apply to Key Employees in a Family Owned Business. However, when it comes to the Owner, of that Family Owned Business, additional matters must be considered and dealt with.
According to the U.S. Small Business Administration 90% of all businesses in the U.S. are categorized as small business, only 30% succeed after passing to the second generation and only 15% succeed after passing to the third generation.
Succession Planning, for a small business, is the creation of a plan to determine :
- Who will own it and in what percentages
- Who will run or manage it
- Planning for the Taxes to be paid
- Providing for the Cash Flow necessary for its continued success.
Many business owners, approaching or being at retirement age, sell the business. This allows them to determine how the proceeds are to be divided by gift, will etc.
The initial steps would be to contact a professional Business Broker to determine:
- What a buyer would pay for the business
- If the price meets the financial goals and objectives of the owner
- Is now the best time to sell or should an Exit Plan be developed to sell at a future date
Normally there is no cost or obligation to find out what a broker can do. It should only take about an hour of the seller’s time. There should be No Up Front Fee for a business priced at its market value. The broker is paid at closing when the seller gets a check. All communication should be confidential.